Friday, August 22, 2014

Indiana Property Tax Collection - We Need Jimmy Stewart

Remember Henry F. Potter, the mean banker played by Lionel Barrymore, in It’s a Wonderful Life. Well Mr. Potter would just love the system that Indiana has for collecting delinquent property taxes. In a few posts, like this one, I have remarked that the IRS has a much more fearsome reputation than it deserves. Due process guarantees under the taxpayer bill of rights can allow taxpayers to go a really long time without paying, offer to settle for substantially less than the full amount and then appeal a rejection of that offer to Tax Court. By comparison, the collection of property taxes inIndiana is a ferocious system. Once property tax is more than a year in arrears it becomes eligible for auction. What is auctioned is a certificate. The minimum bid is the amount of the taxes. Any proceeds over that (“overbid”) are deposited into a special fund that an owner who does not redeem may apply for. The certificate represents a super priority lien on the property. The certificates are an attractive investment for two reasons. If they are redeemed, they pay a very nice interest rate, but there is an even bigger potential payoff as this summary from Grant County explains:

A winning bidder at the tax sale is actually buying a certificate of lien on the parcel, which entitles the buyer to request the court to issue a tax deed to the property within 180 days after the one-year redemption period has expired. There are some requirements that must be met in order for the court to grant this request. Please consult with an attorney to determine what these requirements are. After the requirements are met, all liens, including mortgage liens, but not including state or Federal tax liens, are removed from the parcel and the property will be transferred according to the directions of the tax sale lien holder. The Treasurer can only sell lien certificates at the annual tax sale, and not at any other time. Once bought from the Treasurer they may, however, be transferred between individual holders at any time.

John Waller in his Indiana Commercial Foreclosure Law blog points out the hazard that this system represents to secured lenders. I just wrote about a homeowner who almost sold his house to a stranger for $5,000 after being assured by the Grant County Treasurer’s office that his taxes were up to date. M Jewell LLC (registered agent Tom Terry), represented by Jon Orlosky was in the Court of Appeals of Indiana appealing a decision that had given Max Powell an additional 30 days to redeem his property, since he had been misinformed by the Treasurer’s office. M Jewell LLC was not content with the interest it would get on the redemption of the lien. M Jewell LLC wanted Mr. Powell’s house for the $5,000 it had paid for the certificate, incidentally stiffing the Marion School Employess Federal Credit Union (Of course maybe they could have still collected from Mr. Powell if he had any other assets). Mr. Potter could have taken lessons from these guys. The judges ruled in favor of Mr. Powell on grounds of equity.

It was a close thing, since by making it a matter of equity the judge is in fact admitting that M Jewell LLC had the letter of the law on its side.

Jon Orlosky has experience in advocating for the rights of tax lien holders against careless property owners and holders of other security interest. In 1998, he represented Tom Terry against Star Financial Bank which had financed a modular home on property the Mr. Terry acquired by tax deed. Mr. Terry won that case. In 2005 he represented Cana Investments LLC in something that struck me as a fight over scraps. Cana had the property already and was arguing that a secured lender did not have a claim on the “surplus” deposited with the treasurer. In 2005 he represented Jerry Terry against Terry Hall. Ms. Hall argued that the notice she had received was inadequate. The Court ruled in favor of Mr. Terry, who ended up with Ms. Hall’s property for $22,000.

In 2006 Mr. Orlosky represented Doed Investments LLC. In this case the Court set out the various ways a former property owner might use to set aside a tax deed. They boiled down to the taxes not really being owed and the lien holder not providing the proper notices. Doed Investments LLC had taken Joseph Whallen’s property. Mr. Whallen was hoping to get the tax deed set aside because he had been misinformed. The Court was not buying it:

Cashier at treasurer’s office did not knowingly mislead delinquent taxpayer regarding redemption of property nor induce him to not redeem property, and thus, equitable estoppel did not prevent the auditor and treasurer from reinstating tax sale, where the cashier informed taxpayer that the office would look into whether his bankruptcy meant that he did not have to redeem property, but she never told taxpayer that he did not need to redeem the property.

In 2007 Mr. Orlosky was representing Tec Investments LLC. I have to say I was rooting for him on this one. Tec Investments LLC had gotten a tax deed on property owned by MJ Acquisitions Inc. Tec had purchased a certificate on a small amount of taxes that had been deemed delinquent after MJ had acquired a certificate on even more delinquent taxes. It would have been poetic justice against MJ for Tec to win, but it turns out the county should have used funds in the surplus account to discharge MJ’s obligation.

In 2008 we find Mr. Orlosky representing Double J Ranch LLC and in 2009YHOM LLC. All these cases have quite a bit in common. They are about a tax lien holder fighting to have ownership of the property from a tax deed rather than being content with the redemption amount. The parties Mr. Orlosky represents are either Tom Terry, Jerry Terry or an LLC of which one of them is the registered agent. I am just a tax blogger not an investigative reporter so I cannot tell you whether Tom and Jerry have anything in common besides the same surname and using the same attorney to engage in business that is to me somewhat distasteful.

This reminds me a little bit of the problem I had when I was writing aboutAmway Tax Court decisions. I rounded up over 20 Amway hobby loss cases, which were supportive of the claims made by Amway critics – and none that were not, but reported decisions are the tip of the iceberg of economic activity. I do not have the time or resources to look more deeply into the story of Mr. Orlosky and his client or clients who may well have acquired quite a few properties for really short money. It is worth noting that Indiana is not the only state where property taxes are collected in this manner. As a matter of fact there are companies that will help you get involved if it is something you are interested in. Mr. Potter would be all over it if he was still with us. Sadly, he probably is in spirit. Personally, I would rather get a part time job drowning puppies, but that’s just me.

A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.

Declaration of the Rights of Man

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.